Canada has always had a unique housing industry, especially in comparison to its larger neighbor the United States of America. Unlike the US government, the government of Canada is not up to its neck in subprime lending, and as yet the country has not had to face a housing crisis like the one we saw in the USA in 2008. Having said that, things are not completely rosy when it comes to the Canadian housing market, in fact, there is evidence to suggest that we’re seeing a ‘slow motion’ version of the housing market collapse that occurred in the USA, Spain and other countries. That leaves us with two questions: is there any such thing as the Canadian housing bubble, and if so, is it really about to burst?
Housing prices and the Canadian wage
Vancouver and Toronto . Another factor that’s at work on house prices is the average debt-to-disposable-income ratio. In 1980, Canada’s average was about 66%, now it is around 150%. To put that in perspective, at the peak of the housing crisis in the USA, the debt-to-income ration topped out at 125%. These are worrying signs indeed.
A delicate balancing act
The problem is that many Canadian citizens are so laden with debt that they’re entirely at the mercy of interest rates. At their present levels, the vast majority of borrowers can afford their repayments, on both loans and mortgages. But if base interest rates rise, even to 3% or 4%, countless Canadians would find themselves unable to repay their mortgages. This kind of widespread crisis would facilitate a huge burst of the housing bubble, and leave the country in a financially crippled situation. It is true that the Canadian government is in a stronger financial situation than that of countries like the United Kingdom and Spain, but that doesn’t mean that it would be able to shoulder the financial burden that such a collapse would produce. Instead, the onus lies on the government to try and encourage deleverage to reduce the debt ratio of its citizens. If wages can increase and slow deleverage can begin, there is still a chance that the Canadian housing bubble may resolve itself, but as it stands, things are in a precarious place. Sellers want the best price, but so do buyers: after all, we all want to save money which can help look after your family. Once house prices in Canada drop and the bubble is less of a risk, perhaps it will be easier to keep your family safe for less of an outlay. Until they do, though, thinking of family insurance and other such additions to a home can seem more of a sideline issue.
Has the bubble already begun to burst?
There is evidence that a burst has already begun. For months now, the Canadian government has been implementing much tighter control over lending rules, especially for mortgages. This has made it more difficult for people to buy or sell houses, and has thus started the cogs that should bring the average house prices down. However, because of the levels house prices have already reached, sellers are reluctant to drop their prices. By the same token, buyers are reluctant to purchase at such high prices – it’s somewhat of a stand-off. The effects of the governmental measures are already becoming clear: home sales in September 2012 were more than 30% lower than the same period in 2011. This is clear evidence that the housing market is being impacted by the government’s measures – but where it leaves consumers who are stuck in the housing bubble, who’s to say? Only time will tell whether a needle is poised to turn Canada into a carbon copy of the USA – economy and all.